Morgan Stanley to pay fine over improprieties in Facebook IPO run-up

Massachusetts has issued a fine of $5 million against Morgan Stanley (PDF) over improprieties during Facebook’s initial public offering (IPO) earlier this year. The deal, announced Monday, is a settled amount the investment bank came to with state regulators—neither admitting nor denying guilt. To put that fine in perspective, Morgan Stanley’s Q3 2012 net revenue was $5.3 billion.

Before Facebook’s much-watched IPO, the company issued an amended prospectus (S-1 filing), which indicated a lower revenue model. That, in turn, prompted a number of analysts to lower their expectations for Facebook’s financial performance.

An investment banker in California not named in the official settlement (who the New York Timesidentified as Michael Grimes) is accused of being personally involved with the decision to not only make the S-1 filing, but also the decision to communicate new information to analysts.

“Morgan Stanley’s senior investment banker did everything but make the phone calls himself,” Massachusetts Secretary of State William F. Galvin said in a statement. “He not only rehearsed with Facebook’s treasurer who placed the calls to the research analysts, but he also drafted the majority of the script Facebook’s treasurer utilized when calling the research analysts.”

The investment bank, in its own statement released to the media, said it was “pleased” with the settlement. “Morgan Stanley is committed to robust compliance with both the letter and the spirit of all applicable regulations and laws.”

31 Reader Comments

*sigh* And just when are we going to start holding individual people (real people, not corporations) accountable for shady and/or illegal behavior? And is $5m really a fine commensurate with the improprieties? I mean, I get it, it's a lot cheaper and quicker (at least on the tax payers) if they settle things without going through any kind of legal proceedings, but does a paltry $5m fine bear any relation to how much money that Morgan Stanely actually made off of this IPO?

Can someone explain why a Morgan Stanley banker would do this? Did someone make money based on what he did? Was it a scheme to lower Facebook's value so that shares could be bought below market value?

I don't understand the scam, someone please explain

The scam is that Morgan Stanley used insider information that was not publicly available. they were involved in determining Facebook's IPO value and profit forecast, and were on the inside track knowing that it wasn't expected to hit those original numbers...... but concealed that info. Their firm was one of the market evaluators for Facebook.... giving them the appraisal.... but at the same time, used it for their own benefit.

In a nutshell...... I'm giving you a glowing review, but at the same time, you and I both know you're not going to make the money I'm claiming, and we're placing our bets elsewhere while letting other suckers take the bait.

Edit: More specifically, if you read the actual SEC report they link, at the very LEAST, there is the perception that they did not share information that should have been revealed publicly, and that Morgan Stanley didn't immediately hop-to and do what they should have done.

So, from a pure "perception" standpoint, it LOOKS like they maybe have used inside information for their own gain. Proving it looks like it'd be a hell of a challenge, but possible, and all you have to do is convince the courts that it happened. Morgan Stanley basically shrugged and handed over 0.1% of their QUARTERLY earnings (not yearly) to make the problem go away, and remain silent, rather than risk things going further.

Financially speaking..... it's a laughable decision. As someone else mentioned, it'd be like you paying a parking ticket rather than dealing with get a vehicle towed, paying for impound, and going to court over it all.

The scam is with a lowered estimates of revenue they have an easier time meeting the quarterly revenue growth. Having two consecutive of little or negative revenue growth periods is pretty much a death nail to any company. Portfolio managers won't touch you regardless of any other positive indicators. It's like the "square root of a negative number" error of fund management.

Can someone explain why a Morgan Stanley banker would do this? Did someone make money based on what he did? Was it a scheme to lower Facebook's value so that shares could be bought below market value?

I don't understand the scam, someone please explain

The scam is that Morgan Stanley used insider information that was not publicly available. they were involved in determining Facebook's IPO value and profit forecast, and were on the inside track knowing that it wasn't expected to hit those original numbers...... but concealed that info. Their firm was one of the market evaluators for Facebook.... giving them the appraisal.... but at the same time, used it for their own benefit.

In a nutshell...... I'm giving you a glowing review, but at the same time, you and I both know you're not going to make the money I'm claiming, and we're placing our bets elsewhere while letting other suckers take the bait.

Hmm. But this story makes it seem like this settlement was based on them revealing new information about lower expectations.

It sounds like if they had never released the new info about lower expectations then they wouldn't have done anything wrong but the IPO still would have been over valued?

I would think it would make more sense if the illegal behaviour consisted of leaking false information to increase the value as opposed to true information that decreased the value. But I don't remember any leaks about the Facebook IPO, the media hype I heard didn't seem to be financial analyst driven.

Nope. It was still $5.3 billion. They already got that money and walked away with it, and have probably re-invested it and made more. They already "covered" that $5 million. Figure... if they put that $5 bil into investments..... even at a paltry 1% profit, they still made enough off of it to cover that $5 mil.

Can someone explain why a Morgan Stanley banker would do this? Did someone make money based on what he did? Was it a scheme to lower Facebook's value so that shares could be bought below market value?

I don't understand the scam, someone please explain

The scam is that Morgan Stanley used insider information that was not publicly available. they were involved in determining Facebook's IPO value and profit forecast, and were on the inside track knowing that it wasn't expected to hit those original numbers...... but concealed that info. Their firm was one of the market evaluators for Facebook.... giving them the appraisal.... but at the same time, used it for their own benefit.

In a nutshell...... I'm giving you a glowing review, but at the same time, you and I both know you're not going to make the money I'm claiming, and we're placing our bets elsewhere while letting other suckers take the bait.

Hmm. But this story makes it seem like this settlement was based on them revealing new information about lower expectations.

It sounds like if they had never released the new info about lower expectations then they wouldn't have done anything wrong but the IPO still would have been over valued?

I would think it would make more sense if the illegal behaviour consisted of leaking false information to increase the value as opposed to true information that decreased the value. But I don't remember any leaks about the Facebook IPO, the media hype I heard didn't seem to be financial analyst driven.

Still doesn't really make sense to me, but whatever...

What is the difference between leaking false information to increase the value and not-revealing information that ensures the value stays artificially high? In one..... I'm lying and making it sound better than it really it. I'm deceiving people directly and intentionally. In the second, I'm not saying anything because I know that right now.... it's worth less than it really is. I can take actions to protect myself or steer my customers elsewhere and still come out ahead potentially, because I know something about it that by law, SHOULD be publicly revealed, but I'm not saying anything. I'm deceiving people through silence.

In simpler terms?..... it'd be like me knowing that you're about to walk into a punji pit that I helped build, and that I know is still there, but keeping mum about it.

There was no problem with MS releasing new info showing lower earnings. The problem is they only told a few/some of the high powered investors, not the market at large. At best, they helped their friends not buy into something that was liable to go down. At worst, they enabled themselves and others to place bets on the downward movement.

There was no problem with MS releasing new info showing lower earnings. The problem is they only told a few/some of the high powered investors, not the market at large. At best, they helped their friends not buy into something that was liable to go down. At worst, they enabled themselves and others to place bets on the downward movement.

Real hard to prove, which is why the Feds settled.

Ah, OK. I wasn't getting that they didn't release it publicly and only told a few people. That makes more sense. I thought they were getting punished for releasing it publicly.

What is the difference between leaking false information to increase the value and not-revealing information that ensures the value stays artificially high? In one..... I'm lying and making it sound better than it really it. I'm deceiving people directly and intentionally. In the second, I'm not saying anything because I know that right now.... it's worth less than it really is. I can take actions to protect myself or steer my customers elsewhere and still come out ahead potentially, because I know something about it that by law, SHOULD be publicly revealed, but I'm not saying anything. I'm deceiving people through silence.

In simpler terms?..... it'd be like me knowing that you're about to walk into a punji pit that I helped build, and that I know is still there, but keeping mum about it.

There isn't any difference, really, and the SEC can fine you for either. It's just that claims that FB withheld material information were investigated and found lacking:

Can someone explain why a Morgan Stanley banker would do this? Did someone make money based on what he did? Was it a scheme to lower Facebook's value so that shares could be bought below market value?

I don't understand the scam, someone please explain

The scam is that Morgan Stanley used insider information that was not publicly available. they were involved in determining Facebook's IPO value and profit forecast, and were on the inside track knowing that it wasn't expected to hit those original numbers...... but concealed that info. Their firm was one of the market evaluators for Facebook.... giving them the appraisal.... but at the same time, used it for their own benefit.

In a nutshell...... I'm giving you a glowing review, but at the same time, you and I both know you're not going to make the money I'm claiming, and we're placing our bets elsewhere while letting other suckers take the bait.

Edit: More specifically, if you read the actual SEC report they link, at the very LEAST, there is the perception that they did not share information that should have been revealed publicly, and that Morgan Stanley didn't immediately hop-to and do what they should have done.

Thanks for the explanation. I must say, the present Ars article doesn't make this clear at all, and, like others thought too, seems to say that what they did wrong was releasing information.

This is a state fine....any different than a federal inquiry (is any such thing happening?). I.e. does this kabosh any people digging further into the situation? If so, huge win for Morgon Stanley and another reason people sympathize with the occupy movements.

*sigh* And just when are we going to start holding individual people (real people, not corporations) accountable for shady and/or illegal behavior? And is $5m really a fine commensurate with the improprieties? I mean, I get it, it's a lot cheaper and quicker (at least on the tax payers) if they settle things without going through any kind of legal proceedings, but does a paltry $5m fine bear any relation to how much money that Morgan Stanely actually made off of this IPO?

The Wall Street lobbying arm is one of the most powerful in Washington. What you're asking for is fair and just, but is also never going to happen.

There was no problem with MS releasing new info showing lower earnings. The problem is they only told a few/some of the high powered investors, not the market at large. At best, they helped their friends not buy into something that was liable to go down. At worst, they enabled themselves and others to place bets on the downward movement.

Real hard to prove, which is why the Feds settled.

This is a much more concise and clear explanation of what just happened.

I also want to know if this State-level settlement stops any Federal-level investigation?

*sigh* And just when are we going to start holding individual people (real people, not corporations) accountable for shady and/or illegal behavior? And is $5m really a fine commensurate with the improprieties? I mean, I get it, it's a lot cheaper and quicker (at least on the tax payers) if they settle things without going through any kind of legal proceedings, but does a paltry $5m fine bear any relation to how much money that Morgan Stanely actually made off of this IPO?

Wow. A 0.1% fine. It should have been AT LEAST $50M to send a message. At $5M, a different message is sent:

For the next 5 years, the "analysts" at Morgan Stanley will henceforth be call "the criminals at Morgan Stanley." While they may not have to say they're guilty, it doesn't make them any less not guilty.

Can someone explain why a Morgan Stanley banker would do this? Did someone make money based on what he did? Was it a scheme to lower Facebook's value so that shares could be bought below market value?

I don't understand the scam, someone please explain

The scam is that Morgan Stanley used insider information that was not publicly available. they were involved in determining Facebook's IPO value and profit forecast, and were on the inside track knowing that it wasn't expected to hit those original numbers...... but concealed that info. Their firm was one of the market evaluators for Facebook.... giving them the appraisal.... but at the same time, used it for their own benefit.

Yep. It's a blatant and obvious conflict of interest and should be against the law. Neither the company making an IPO nor their agents should be allowed to pay the auditing agency. That agency should be in the employ of the exchange itself.

*sigh* And just when are we going to start holding individual people (real people, not corporations) accountable for shady and/or illegal behavior? And is $5m really a fine commensurate with the improprieties? I mean, I get it, it's a lot cheaper and quicker (at least on the tax payers) if they settle things without going through any kind of legal proceedings, but does a paltry $5m fine bear any relation to how much money that Morgan Stanely actually made off of this IPO?

Wow. A 0.1% fine. It should have been AT LEAST $50M to send a message. At $5M, a different message is sent:

"Do whatever you want, the government does not care."

I'd actually say take away certain privileges they have, such as they can't underwrite any IPO's for 6 months (any ones currently under way can continue). Don't know how much money they might lose, but it'd probably be at least the $5M, and is more proportional to their impropriety. If we can't trust you to do X, then we won't let you do X. Oh, and the individuals involved need to face a personal fine or something similar. People will keep doing it, and as long as it's the company taking the fall (ha! some fall they got), they won't give a crap. By the time the fallout happens, they'll probably have gotten their money and moved on.

Notwithstanding how much Morgan Stanley made in total, how much did they make from this scam? The fine should be about, say...10 times that.

Look at the HSBC fine announced last week - 1.9 billion. Sure, lot of money, biggest ever, etc. They were essentially, from the sound of it, openly laundering Mexican cartel money. How big a dent did $1.9 billion put in how much profit they made from it? Probably not much.

Or, look at Bank of America's overdraft scam. They settled for $300 million or so, when it's estimated they made $3 billion - they call that cost of doing business. Don't think they won't turn around and try the same shit once the memory's faded.

Until the feds/states/someone starts making it hurt when financial institutions get caught in criminal conspiracies, they won't stop. And when are we going to see criminal prosecutions for the people that do these things? Or how about, if it's egregious enough, dissolve the corporation? But we saw the answer to that with HSBC - the feds played it by saying criminally prosecuting the upper management might bring the bank itself down, and it's apparently another "too big to fail" sort of place. Lesson being, it really is true that once you have a certain amount of money and power, you're untouchable.

Of course, had anyone actually been sane at the time, they never would have PURCHASED it for $40 a share in the first place, when the company is worth like, $2-4 a share.

Frankly, it was an obviously bad investment even without this insider knowledge.

You and I might know it was not worth $40 per share, but there are people out there that still want to listen to "professional" analysts/criminals. Basically, "analysts" are the snake-oil salesmen of the 21st century.

Facebook is the biggest scam and rip off invented in the last years. Its a great scheme to defraud billions of US$.

I feel sorry for anyone investing in FB shares, as some day without a warning they will be valued at 1 penny and again a small group of people will be millionaires.

Facebook is a crooked company. They started wrong and they will end up wrong. The same people that pushed (invested) in FB are behind the scam, the same ones that gave them so much free media advertisement.

Facebook is a gigantic fraud scheme and it will blow up eventually. This is why this article does not surprise me. And Morgan did this probably working together closely with Facebook. The fine is just laughable. They would do it 1000 times again for that fine. Its just ridiculousness to put a money fine to the ones that actually create money from thin air.

Analysts at eight banks, including the three lead underwriters, Morgan Stanley, J.P. Morgan Chase & Co. and Goldman Sachs Group Inc., rated the stock a "buy." Another nine dubbed the shares a "hold," and one, BMO Capital Markets, bestowed the equivalent of a rare "sell" rating on the stock.

That's from the Wall Street Journal. So only 5 banks that didn't have a dog in the fight rated it as a Buy, while 9 gave it a hold, and Bank Of Montreal gave it a sell.

The only people that got hosed in all of this are the individual investors. I know we are suppose to have sympathy for the little guy, but the fact is the little guy is nothing more than a gambler justifying his addiction through the "legitimacy" of the markets. The people who make the most money in the game, don't buy stocks, they tend to buy chunks of companies outright.